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There are two sides to real estate development feasibility study: The Cost Side & The Income Side.

I am going to concentrate in this article on The Cost Side.

Having told you that a feasibility study is vital when applying for finance, it is however, just another cog in the wheel of the property development process.

To help you come to grips with the term, feasibility study, it might help you if I call it a, Financial Analysis, of all the costs and income revenue that tell you if your development will produce a profit.

Where To Start?

When you are at the very beginning of preparing a feasibility study – I mean when you are just thinking about buying the land on which you propose to develop a building, your initial cost figures are liable to be a bit ‘rubbery.’

They’re general – they are not exact and can’t be exact, because all you know at the beginning is the ‘asking price of the land.’

Hopefully the land cost will be less than the asking price after you complete the buying negotiation. Can you see that there is going to be a difference in just that first item of the feasibility study – land cost?

OK – if you accept that, you’ll also accept that the associated land costs will also vary. Items like conveyance costs, legal charges, stamp duty, adjustment of utility charges and other costs.

That should demonstrate to you that a feasibility study goes through several stages.

The first stage uses figures that are the ‘best’ figures you have available at the time. The last stage is when all your cost figures are firm and final.

But as you are only at the stage of deciding to buy the land or not, you figures are “general and loaded with safety” – in dollar terms.

Let’s be clear about what I mean here. For the land cost you would use the full asking price and all the associated costs, at full calculation for your initial entry in the feasibility study. Then if you negotiated a lower price you are safe.

If you first feasibility study shows a satisfactory profit return for the risk of doing the development, you will proceed and gain legal control of the land.

Well, to gain control, you must have concluded a negotiation on the land sale price – so you have now “firmed up” on one of the cost items. Hopefully it is lower than, or the same as the figure you allowed in the feasibility study.

In the first feasibility study you will allowed a figure for the fees of the design consultants.

People like the architect, the engineer and so on. Well now you have to engage them to create the initial design for you and again this is a negotiation that will either be within your feasibility study allowance or not.

The next major item in your feasibility study will be the constructions cost.

If your development comprises ten town homes, that are aimed at the luxury end of the owner occupier market, your market knowledge may tell you that you should allow $180,000 per to town home or $1.8 million to build all ten.

Your design team will have to design well within those cost parameters and after the initial design is complete in preliminary format, you will need to get a few master builders to give you a price.

If you are well within the $1.8 million, then you may decide to leave the $1.8 million figure in your feasibility study. This would be smart if the buider’s figure was say, $1.7 million.

The extra $100,000 acts as a safety buffer as you are only pricing off non-detailed preliminary design plans.

Now. let’s say it’s your intention to sell all these town homes at a profit, so you have allowed some marketing costs to cover sales commissions, brochure printing etc. in your feasibility study.

At this stage the biggest figure is the sales commission and so you have been out talking to agents and so you have a good idea that your figures are OK.

At this stage we have wrapped up all of the “major” costs except the finance costs or interest on you borrowed development finance.

By now, hopefully you will have bought my e-book, and know how to go about seeking development finance the correct way and not the dumb way.

So you will not only know the best interest rate, but more importantly, have the correct type of loan and on the correct “terms” – you know the small print stuff.

At this stage everyone I teach wants to buy a software program so that they can get all the calculations done “easy like.”

Well I have a problem with that – I know, and believe, that for you to get to know your development intimately, you have to go to the trouble of doing the feasibility study figures manually – it is only adding, subtracting and multiplying some figures.

It is not difficult and the benefit is that you get to “know” the importance and interplay of each figure on the end result, being profitability.

So a simple spread sheet broken up into months on an XL is all you need.

In month one you buy the land for $286,500 and associated costs of say, $21,700 so you enter a figure of $310 ($308,200 rounded up to $310,000 – you have added a bit of safety in this one item)

Note: never use the full figure allways round up and take off the last three zeros – so $310,000 becomes $310l; $3,500 becomed $3.5 and $800 becomes $8. This makes it easier to read and creates less mistakes.

You then spread the design costs across the page to reflect the negotiated deal you did with the designers.

Then the construction costs – marketing costs and so on. You can divide these individual costs up into a many smaller items as you wish.

But the real thing you are doing is setting out your best estimate of the flow of cash that is required from the Lender and also from your own equity funds – the Cost Cash Flow.

Once you have these figures spread across the page you add then vertically for a total monthly figure – and also horizontally for each item total.

Hopefully the big development cost total in the bottom right hand box is equal to the vertical and horizontal totals.

It is – great; go to the top of the class.

Earlier I mentioned that you will have concluded the terms of your development loan.

Well, let’s say that the Lender has agreed to lend you 80% of your costs. This means you have to provide 20% from your own capital resources.

Having got the monthly totals you can now calculate 80% of each figure, because this is the amount on which you will pay interest.

It is these figures that you now calculate interest on each monthly cash flow and arrive at a total cost of the finance for your development.

You now add the total interest figure to the Cost Total and arrive at what we call the Total Capital Cost of your development.

There are a total of about 44 item headings that make up the Cost Side of a Feasibility Study.

Payment schedules can range from increments of 10% up to 20%. It is at the discretion of the developer how they structure it

The benefit of buying off-plan is that re-sales command relatively high premiums therefore reducing any profit margin in the investment considerably.

Who Can Buy?

Any investor, overseas or resident, can purchase in Dubai’s luxury property developments.

Home Financing

If you are looking for home financing options in Dubai, most developers offer finance packages. However, Tamweel is certainly one of the best options. Tamweel offer a wide range of products for you to choose from. Tamweel finance properties that are ready to move into, as well as those that are under construction. They will even pre-approve your loan before you start looking so that you will know exactly what your budget is. In addition, Tamweel offer you the option of owning the property outright, or leasing it from them with an unconditional offer to own it at the end of the lease period – whatever suits you better. All of their products have been designed keeping your individual needs in view, especially the need for stability and peace of mind, and that is what makes us sure that they have a solution that is just right for you.

Payment Terms

In general, a deposit representing 10% of the buying price is required at the contract-signing stage for all new development properties. This is followed by what are known as stage payments that are made at regular intervals through to completion. Contact us for project-specific details.

Bank Accounts

Buyers do not need a local bank account to arrange purchases, though these can easily be arranged through our partners in Dubai.

Appreciation

Property prices in Dubai have experienced considerable growth, and are forecast to remain this way for some time. This can be clearly seen if comparing current prices with those of 6 months ago. Like all investments, however, property prices can go down as well as up.

To Buy on the Secondary Market or the Resale Market:

If during the construction stage of a property a second party wishes to purchase the property from the owner then the process is straight forward.
The buyer pays the owner an agreed sum which includes those payments the owner has already made to the developer and any premium applied by the owner.

Exchange of contracts with owner at the developers head office usually within two week period.

The developer will then charge a percentage of the original price of the property (typically between 2% to 7%) to reissue the PSA with a new name on it and update their title records. This must be done either in person or with the buyer’s authorised representative. The whole process takes a matter of minutes.
Contract re-issued in buyers name – there is no legal representation for either party or any stamp duty implications.

The buyer will then continue to pay the remaining instalments to the developer as laid out in the PSA.
Commission, typically 2 to 3% is paid to the agent.
The transfer fee is paid by the purchaser.

What exactly is freehold in Dubai?

Purchasing a freehold property in Dubai now means that you own the property forever or until you decide to sell it. You are allowed to pass this property to your family for example, and they enjoy the same level of ownership as you do.

Most important for investors, your resale rights are guaranteed, as is your freedom to rent out your property to a third party, though some restrictions apply to individual developments.

You should note that although these are freehold properties, some conditions on their owners apply, because they are “private community” developments. These conditions will restrict what owners can do with their properties, and oblige them to maintain their properties to certain standards, according to the themes and quality of the communities.

When buying an apartment, the nature of ownership is different from that of a villa, because an apartment is a unit in a building. These are normally classed as “common hold”. Sale agreements for apartments do, however, usually warrant effective full ownership of the unit, subject to restrictions applying to the building, such as renting out the unit, and making modifications.

Where can you buy freehold properties?

Most property developers in Dubai offer freehold, but so far most of the freehold developments have mostly been limited to the Sheikh Zayed Road, and the area of Jumeirah (including Palm Island). However, exceptions to this include the Arabian Ranches and Emaar Towers in downtown Diera. Other future developments include Nakheel’s International City project.

What about buying in other emirates?

So far, the UAE as a whole does not have laws regarding the sale of freehold property to non-GCC nationals. Each emirate makes its own property laws, as Dubai has done. Recently Abu Dhabi announced the availability of freehold, limited to “surface rights” for non-GCC nationals in the Al Raha beach area, outside the main city limits. Ras Al Khaimah, in the north, has created a similar development. The other emirates are expected to follow suit, but there have been no definitive announcements at the federal level yet.

Are property owners eligible for residence visas in the UAE?

Many developments give you the opportunity to gain a residency visa through purchase. Read about Procedures for obtaining a residence visa in our articles under Immigration.

Property Law

The freehold property market in Dubai really started in 1998 when the Dubai Marina project was launched. At that time there was no freehold property law, and villas were sold “leasehold”, on 99 year leases. In 2002 a decree was issued by the Dubai government granting freehold rights to non-GCC nationals (The GCC is the Gulf Cooperation Council, comprising Saudi Arabia, Kuwait, the UAE, Oman, Bahrain and Qatar.) This provided the impetus that has led to the size and dynamism of Dubai’s property market today.

Dubai Residency

The Government has stated that a special category of residence visa will be granted to people buying ‘foreigner’s’ properties. The visa will allow a purchaser to live, but not work in Dubai. The arrangements for granting, and the terms of the visa, are at this time unclear.

Only the Government of the UAE can grant these visas, not the developer or estate agent.

There can be a lot of confusion surrounding Commercial Finance and what it implicates within the financial world. People tend to confuse Development Finance with Commercial mortgages, which is more than easily done as the two do tend to overlap one another. Development finance is where an individual or company/business is looking to develop property/properties and have some capital but need a short term loan to help complete the development. Depending upon the lender and the circumstance, such loans normally span between 12-24 months. Commercial Mortgages on the other hand, are usually only required once the development has been completed and additional funds are necessary. Hence, Development Finance and Commercial Mortgages do tend to overlap. Despite the “Credit Crunch”, Development Finance is rapidly becoming more main-stream and is a very specific type of finance. Development finance is an extremely active market, with businesses wanting to expand for survival during the economic downturn. There are many high street lenders out there and therefore there is a wide variety of development finance specialists available to the consumer. It is recommended that you seek professional advice in order to find the right deal for you.

Typically in the UK, Development Finance is used for various development plans such as; Property Refurbishment, New Build Projects, Property Conversions and initial land purchase and international projects. There are various different forms of this type of lending depending upon the needs of the individual/business. For example, a Senior Debt Loan usually covers the first 70% – 80% of loan to value although it can be arranged against gross development value. A Mezzanine Loan is a second charge loan on top of the senior debt loan, usually used to fund costs on one property while a developers financial resources are tied up elsewhere. Finally, Joint Venture 100% Finance contracts you with an experienced partner who underwrites the project and shares the profits upon completion.

Property development is about having a vision; it’s about understanding the market and turning that vision into a reality. However, developers often have problems getting the finance right and knowing what products are available and which lenders to use can be confusing. Which form of development funding is right for you, depends upon your vision, whether you are a homeowner looking to invest or a company wishing to expand. There is also finance available for community projects which provide financial support to businesses and individuals in disadvantaged communities. Therefore, Development Finance is determined entirely upon an individual assessment made by the lender. Lenders will look specifically at aspects of the development proposal, such as; land purchase, ground work/services, footings/base, first fix/second fix and final snagging/sign off. In the difficult current market, lenders have to be more careful when choosing which developers to back; they are much more likely to support a developer with experience in the field than someone new to the industry.

Commercial Lenders are there to build a relationship with the developer in order to share their vision and provide the support needed to make that vision a reality. No matter what particular development loan you have opted for, most can cover building costs, labour and architect/professional costs. Property development loans will be secured against the land or the property you wish to develop. More recently introduced forms of development finance can be used for debt, mezzanines or equity whereas other more traditional forms require deposits of around 20%-30%.

Loan to Value rates and interest rates vary depending upon experience and percentage of funds required for development. Benefits of this form of finance includes that each development case is assessed on its own merit and it’s a form of finance that can be raised quickly, putting your development project into fruition as soon as possible. Additionally, the lender will be continually on hand to support the developer with advice and help manage the development funds. Whether the finished project is used to expand your property or used to spark a bigger development plan, development finance is the ideal funding to support you throughout the development.